On 15 January 2021, the Board of the National Bank of Romania held a meeting in which the following members took part: Mugur Isărescu, Chairman of the Board and Governor of the National Bank of Romania; Florin Georgescu, Vice Chairman of the Board and First Deputy Governor of the National Bank of Romania; Leonardo Badea, Board member and Deputy Governor of the National Bank of Romania; Eugen Nicolăescu, Board member and Deputy Governor of the National Bank of Romania; Csaba Bálint, Board member; Gheorghe Gherghina, Board member; Cristian Popa, Board member; Dan-Radu Rușanu, Board member; Virgiliu-Jorj Stoenescu, Board member.
During the meeting, the Board discussed and adopted the monetary policy decision, based on the data and analyses on current and future macroeconomic, financial and monetary developments submitted by the specialised departments, as well as on other available domestic and external information.
Looking at the recent developments in inflation, Board members showed that the annual inflation rate had continued to fall below the mid-point of the target in the last two months of 2020 to reach 2.14 percent in November, from 2.24 percent in October, and 2.06 percent in December – i.e. running marginally lower than the forecast and almost halving versus the 4.04 percent level seen in December 2019. The decline in the past two months had owed to a relatively faster deceleration in core inflation, in a context in which the disinflationary impact of changes in VFE prices had been counterbalanced, that time around, by the influence of higher prices of fuels, tobacco products and electricity.
It was pointed out that the drop in the annual adjusted CORE2 inflation rate – to 3.4 percent in November and to 3.3 percent in December 2020, from 3.6 percent in October –, was in line with the forecasts, being primarily attributable to the disinflationary base effects associated with the developments in the prices of some processed food items, as well as to the minor impact of the slowdown in the depreciation of the leu against the euro in annual terms. Its level remained significantly above that of headline inflation, some Board members noted, being further marked by the pre-pandemic underlying inflationary pressures and by the associated inflation expectations. In addition, it probably reflected minor influences from a rebound in consumption in the second half of 2020, as well as from supply-side disruptions and costs linked with the pandemic and with the measures to prevent the coronavirus spread, other members deemed.
As for the cyclical position of the economy, Board members showed that economic activity in Q3 had reversed a significant part of its previous contraction, although slightly below expectations, adding 5.8 percent in quarterly terms (after dropping by 12.2 percent in Q2) and declining at a slower pace in annual terms, i.e. -5.7 percent compared to -10.3 percent in Q2. In the absence of the drastic contraction in agricultural output – impacting, inter alia, potential GDP –, the economy would have seen a slower fall in annual terms, i.e. -3.2 percent, Board members noticed, with developments probably triggering a substantial narrowing of the aggregate demand deficit in that period, only slightly smaller than in the November 2020 forecast.
It was remarked that the recovery had owed mainly to domestic demand, particularly to household consumption. The latter had seen a strong rebound in Q3, in light of the revival in purchases of goods and services after the lifting of some mobility restrictions, amid the relatively improved labour market conditions and a renewed step-up in real disposable income, inter alia under the impact of the hike in pensions in September 2020 and the drop in interest rates on loans to households. Moreover, gross fixed capital formation had continued to increase mildly in annual terms, in the context of a re-acceleration in the dynamics of construction, with a strong contribution from public investment, together with the support of government programmes, which could enhance the growth potential of the economy in the future. At the same time, the negative contribution of net exports to annual GDP dynamics had decreased visibly, some Board members pointed out, given that the significant upturn in exports had outpaced the recovery of imports of goods and services, entailing also a fall in the trade deficit compared to the same period of the previous year. However, the current account deficit had resumed its advance in annual terms, as a result of a new worsening of the primary income balance, on the back of flows of reinvested earnings, while its coverage by foreign direct investment and capital transfers had continued to narrow.
Board members noted that labour market conditions had seen a relative improvement as of mid-Q3 2020, against the backdrop of the recovery in activity in significant sectors, as well as with government’s support measures to maintain employment relationships. The number of employees economy-wide had continuously risen in August-November, reversing to a great extent the decline seen in spring, whereas the ILO unemployment rate had been mainly on a downward path, falling from the 5.5 percent peak seen in July amid the pandemic to 5.1 percent in November. At the same time, the job vacancy rate had posted a mild advance in Q3, for the first time in 8 quarters, causing labour market easing to stop, in the context of ever more apparent structural changes. Under the circumstances, after the sharp slowdown recorded during the state of emergency as a result of the enhanced recourse to furlough, the annual growth of average gross nominal wage earnings had re-accelerated in Q3, remaining almost flat in October-November, not far from the levels seen in the pre-pandemic months. It was deemed that, over the near-term horizon, the outlook for the labour market would probably remain favourable – amid, inter alia, some government support measures being extended and firms’ activity and working conditions gradually adapting to social distancing –, also in light of some survey outcomes. The longer-term outlook continued, however, to be marked by elevated uncertainties, given the worsening of the health crisis in some European countries and the protraction of the current pandemic wave on the domestic front, hence posing risks to some sectors and to the viability of some firms.
Board members discussed at length recent developments on the domestic financial market. It was agreed that they reflected an obvious improvement in investor sentiment on the Romanian economy outlook following the political events of December 2020, conducive – alongside the increase in global risk appetite – to the easing of money market liquidity conditions as well. Under their influence, key interbank money market rates had stuck to a downward path, which had steepened afterwards, while yields on government securities had followed a sharper downward course immediately after the first 10-day period of December 2020. Moreover, the leu’s exchange rate had remained relatively stable, including in the first part of January 2021, in line with its behaviour during 2020, underpinned by the interest rate differential on the financial market, in the context of its gradual decrease, Board members pointed out. In turn, the average interest rate on new loans had gone further down October through November overall versus the previous quarter’s average, while the benchmark index for loans to consumers (IRCC) had followed a slightly steeper downward path at the beginning of 2021; however, the characteristics of the index remained a source of uncertainty as to monetary policy transmission, some Board members reiterated.
It was observed that the annual dynamics of credit to the private sector had picked up further in the first two months of 2020 Q4 – reaching 4.6 percent in November from 4.0 percent in September –, amid the faster growth in leu-denominated loans to non-financial corporations, prompted by the IMM Invest Romania Programme and the downtrend in interest rates. The growth of leu-denominated household loans had also remained robust, albeit gradually decelerating, mainly for consumer credit. Thus, the share of domestic currency loans in total credit had climbed in November to a post-January 1996 high of 69.3 percent. Reference was also made to loan moratoria, with a favourable impact on the leu-denominated credit stock, but also on the real disposable income, during the suspension of payment obligations to credit institutions, yet with contrary effects subsequently. Mention was also made of the renewed pick-up in the particularly swift dynamics of broad money October through November overall, primarily correlated with the easing of the budget execution – inter alia in the context of pandemic relief measures –, as well as with larger liquidity injections from inflows of European funds.
As for future developments, Board members showed that, according to the latest information and analyses, the annual inflation rate would probably witness a slight step-up January through February 2021, followed by a correction at end-Q1. Some members underlined that the pick-up was entirely attributable to exogenous CPI components and was in line with the latest medium-term forecast published in the November 2020 Inflation Report, which saw the inflation rate sticking close to the mid-point of the target over the policy-relevant horizon, amid the disinflationary effects from the aggregate demand deficit. The main upside influences at the onset of the year were expected from developments in fuel prices, also amid the base effect associated with the removal of the special excise duty on motor fuels in January 2020, as well as from administered price dynamics, given the liberalisation, starting 1 January 2021, of the electricity market for household consumers. However, Board members concluded – following the assessment conducted – that the uncertainties about that process were considerable, with more pronounced potential implications for CPI dynamics in the short run than those envisaged. By contrast, VFE prices would possibly exert somewhat stronger disinflationary effects, some members pointed out, referring to the bumper crops of certain categories of vegetables and fruit, as well as to the weakening demand for such foodstuffs, due to functioning restrictions in some sectors given the new pandemic wave.
Furthermore, it was observed that, over the near-term horizon, sizeable disinflationary influences would further stem from base effects associated with previous increases in the prices of some processed food items, particularly of pork, and to a small extent from import price developments, under the impact of the expected dynamics of the leu’s exchange rate, all of which would have a bearing on the evolution of core inflation. At the same time, expectations pointed to an abatement of inflationary pressures from disruptions in production/supply chains and from the costs associated with coronavirus infection prevention measures, but also to the emergence of early disinflationary effects exerted by the negative output gap opened in 2020 Q2, as well as of influences from the lingering demand deficits on certain segments of goods and services to households. Under the circumstances, Board members underlined that the annual adjusted CORE2 inflation rate would probably decline at a faster pace in Q1, in line with the November 2020 medium-term forecast, which saw it fall and remain starting 2021 H2 visibly below the mid-point of the target.
Turning to the cyclical position of the economy, Board members agreed that the period from 2020 Q4 to 2021 Q1 overall would probably see a reversal of the economic downturn similar in size to that forecasted in November 2020, yet differently distributed between the two quarters, amid an uninterrupted recovery of economic activity throughout the period – marginal in the closing quarter of 2020, compared to the previously-envisaged halt or slight contraction, and relatively robust in the first three months of 2021, albeit visibly slower than in the earlier forecast. Therefore, instead of standing still, the negative output gap would probably continue to narrow slowly during that period, sticking however to somewhat lower-than-previously-anticipated values, given its closure slightly below expectations, although particularly sizeable, in 2020 Q3, Board members remarked.
At the same time, it was observed that, according to the latest statistical data, the economic recovery in 2020 Q4 – much slower versus the previous period and implying a slight renewed steepening of the economic contraction in annual terms – had been more uneven from a structural perspective, amid the resurgence of the coronavirus pandemic and the fresh restrictions implemented on the domestic front and in other EU countries, less severe however than those during the first wave. Thus, October through November, retail sales had fully reversed the contraction seen in spring, visibly exceeding the February 2020 level and further recording positive annual dynamics, while market services to households had seen their year-on-year decline re-widen considerably. In addition, the volume of construction works had continued to expand at a two-digit annual pace, whereas the narrowing trend of the annual fall in industrial output had almost come to a halt. In turn, the trade deficit had seen its contraction diminish substantially against the similar months of 2020, as a result of the annual decline in imports slowing somewhat more visibly than that in exports of goods and services. Also against that background, the current account deficit had posted a larger advance versus the same year-earlier period.
However, Board members repeatedly showed that a major change in the future fiscal and income policy stance was in store, also vis-à-vis the NBR’s latest medium-term forecast. Specifically, the potential budget deficit target for 2021 and some measures announced/adopted already by the new government – such as that on the temporary capping of public sector wages – rendered likely the start of the necessary fiscal consolidation in 2021, with favourable implications also for the sovereign risk premium and, ultimately, for financing costs.
Nevertheless, Board members agreed that significant uncertainties lingered with regard to the size and instruments of budget consolidation in the current year and further ahead, at least until the approval of the 2021 general government budget, especially amid the sizeable widening, possibly above expectations, of the 2020 fiscal deficit, under the impact of the pandemic crisis and the support measures taken, but also as a result of higher permanent expenditures. It was reiterated that, in terms of economic impact, the counterweight provided by the absorption of European funds allocated to Romania via the EU economic recovery package and 2021-2027 Multiannual Financial Framework was of the essence.
At the same time, Board members underlined that heightened uncertainties and risks stemmed from the external environment, given the worrisome increase in the coronavirus infection rate in some European countries and the recent renewed tightening of mobility restrictions, owing also to the emergence of more contagious strains, weighing on the recovery of euro area economies, probably until the effects of vaccination campaigns become manifest.
Board members were of the unanimous opinion that the overall context under review warranted another 0.25 percentage point cut in the monetary policy rate, given also the transmission lags of the policy rate impulses.
It was considered that such a calibration of the monetary policy conduct was likely to provide an underpinning to the recovery of economic activity over the projection horizon with a view to bringing and consolidating over the medium term the annual inflation rate in line with the 2.5 percent ±1 percentage point inflation target, while safeguarding financial stability.
Under the circumstances, the NBR Board unanimously decided to cut the monetary policy rate to 1.25 percent from 1.50 percent; moreover, it decided to lower the deposit facility rate to 0.75 percent from 1.00 percent and the lending (Lombard) facility rate to 1.75 percent from 2.00 percent. Furthermore, the NBR Board unanimously decided to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.
The NBR Board decision to suspend the calendar of monetary policy meetings was kept in place, with monetary policy meetings to be held whenever necessary.